Unanimous Shareholder Agreement - Explained

By: Updated: April 15, 2022

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These types of agreements are usually used by companies with a small number of shareholders, which are often called “incorporated partnerships.”

A unanimous shareholder agreement (USA) restricts the powers of the corporate directors to manage the business affairs of the corporation. Instead, it gives the authority to the shareholders to make important decisions about how the company operates.

When you start a company with one or two partners, you hope that the partnership will just keep going smoothly. However, sometimes disputes arise or one partner wants to leave the company. 

 

What is a Unanimous Shareholder Agreement (USA)?

First, let’s look at a standard corporation. A company with a large number of shareholders is managed entirely by its directors and officers. The government of Canada sets out the rules for federal corporations and each province has its own corporate requirements.

A unanimous shareholder agreement (USA) is most commonly used for corporations with a small number of shareholders. It provides the shareholders with the power to run the company, settle disputes and decide how shareholders can leave or join.

 

What should a shareholders agreement include?

A USA should address two key areas: decision-making and share transfers.

  1. Decision-making: When one shareholder owns the majority of shares in a corporation, it’s important to set out what decisions can’t be made by a simple majority vote. This protects the interests of the minor shareholders.
  2. Share transfers: There can be a variety of situations in which the agreement must specify how shares should be transferred. This could include the death or disability of a shareholder, an owner who wishes to leave the company or a new partner being brought in.

In the case of share transfers, there are several different possibilities that can be addressed in a USA. These include:

  • Right of first refusal: Existing shareholders have the opportunity to match an offer that a shareholder receives from a third party to purchase his or her shares. This could prevent a third-party buyer from becoming a shareholder if it is deemed not in the best interests of the company.
  • Shot gun: If relationships between the shareholders go sour and one party wishes to exit, this provision can be vital. It allows shareholders to set the terms and price to sell their shares or purchase shares from another shareholder.
  • Piggy back: If a shareholder sells their shares to a third party, this provision allows other shareholders to include their shares in the agreement with the third party. This allows them to exit the corporation as well.
  • Drag along: This prevents minority shareholders from blocking a sale of the company if a majority shareholders wants to exit. It ensures that if a majority shareholder decides to sell, minority shareholders will be required to sell their shares to the buyer as well.

In addition, a USA should have a mechanism for resolving disputes. This is especially important if there are just two shareholders, each of whom owns half the shares. There could be a provision for mediation. Or one shareholder could be given a tiebreaking vote or veto.

The shareholder agreement Canada should also spell out shareholder obligations around contributing capital. As a startup grows, it may need money to finance expansion or purchase buildings and equipment. The USA should specify how funds will be raised. It should also outline penalties if a shareholder fails to contribute the required amount.

 

Advantages of a unanimous shareholder agreement

The key advantage is that the USA spells out, in advance, the rights and obligations of all of the shareholders.

 

Disadvantages of a unanimous shareholder agreement

A USA does not provide perfect protection. When minority shareholders enter into an agreement with a majority owner, there are risks that they will not have a voice in decisions.

Under a USA, the shareholders may take on liabilities that the directors would normally have under a regular corporation, such as to pay salaries and wages. Each prospective shareholder must decide whether they want to assume this risk.

 

In summary: Unanimous shareholder agreements

A unanimous shareholder agreement can be an important component of incorporating a company with a small number of shareholders. This article is intended to provide general information about this topic and should not be considered as legal advice. If you need to create a USA or need legal advice, please contact a lawyer in your province.

If you are being asked to sign a shareholder agreement Canada as part of an incorporation, you may wish to retain your own legal counsel, separate from the company’s legal team. They will help you to ensure that your rights are protected.

 

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